What Twitter’s Post-Earnings Plunge Means for Investors in 2019

Twitter Inc. (TWTR) released its Q4 2019 earnings report, wrapping up a streak of reporting from heavy-hitting U.S. tech companies over the last two weeks. The social media firm reported strong revenue growth and its first full year of profitability since its 2013 IPO, but a substantial decline in monthly active users (MAUs) – the unique number of users to engage with the platform in a 30-day period – seemed to overshadow everything else for investors.

Despite
bullish sentiment clearly reflected in a 30% gain last year, Twitter still
suffers the problems that similarly plague Facebook Inc. (FB). As an online
platform with pervasive cultural influence, Twitter’s efforts to handle
misinformation and hate speech may continue to be reflected in user numbers, which
could consequently affect the share price.

Let’s take
a closer look at Twitter’s newest numbers – and what they could signal in
regards to the company’s rebound that started in 2018…

Twitter’s
EPS and revenue for the October-December period crushed analyst expectations,
while MAUs matched forecasts despite the year-over-year decline.

The firm
earned $0.31 per share in Q4, beating Wall Street’s estimated $0.25 and growing
a massive 63% from the $0.19 reported for the year-ago period. Revenue growth
was also impressive, with the reported $909 million marking a 24% increase from
$732 million in Q4 2018. That $909 million similarly blew past expectations of $869.5
million.

As for
guidance, the firm’s range for Q1 2019 came in lower than anticipated. Analysts
expected $762.43 million, while the company provided a range of $715 million to
$775 million for the January-March period.

The
largest sore spot on the report was user metrics, particularly MAUs. Twitter
clocked 321 million MAUs in the fourth quarter, which – despite meeting analyst
estimates right on the nose – marked a decrease of 5 million from the third
quarter of 2018 and a decrease of 9 million from the fourth quarter of 2017.

Given how
Q4 was the third straight quarter of MAU declines, Twitter’s announcement
regarding a change in metric reporting was hardly surprising, particularly
following similar announcements from Apple Inc. (AAPL) and Facebook regarding
the way they report user metrics.

For
Twitter, the company has decided to stop reporting MAUs in favor of reporting
average monetizable daily active users (DAUs). These are users that log in and
access the Twitter website or on Twitter applications that show advertisements.

Executives
were careful to emphasize that this change in reporting should “not impact the objectives which bring
advertisers to Twitter or the information to which they have access today.”

How Investors Reacted

Despite
stellar revenue and EPS numbers, market participants appeared to only focus on
the lackluster guidance and plunge in MAUs. Shares of TWTR nosedived 9.8% on
Thursday, closing at their lowest level since Jan. 7.

The Bigger Picture

The reaction
to Twitter’s decline in user metrics is overestimated, largely because the
majority of investors compare it to the user metrics of the platform’s current
rivals: Snapchat and, of course, historically rivaling behemoth Facebook.

Despite
being founded within a couple years of Facebook and being only five years older
than Snapchat, Twitter has lagged behind both for quite some time now in terms
of user metrics. The clearest sign of Facebook’s dominance stems from the fact
that Twitter still uses an “m” while Facebook has long used a “b” – Facebook’s
DAUs crossed 1 billion years ago, while Twitter’s, for the most recent quarter,
were a measly 126 million. To make matters worse for investors seeking comfort
in slovenly numbers, Snapchat tallied 187 million DAUs, far more than Twitter
in far less of a timespan.

There’s no
doubting the corroborating influence Twitter has on both shareholders and users,
particularly the users that both favor President Trump and happen to be in CEO
Jack Dorsey’s crosshairs. President Trump boasts 58.1 million followers, yet
61% of his followers were reportedly bots as of October 2018.

This grows
into the most important factor behind Twitter’s MAU decline, and also something
of a necessary evil to maintain the company’s health: much of the sharp drop in
MAUs comes from the company suspending more than 70 million accounts linked to
suspicious behavior or hate speech. These ongoing efforts have been illustrated
in the banning of high-profile conspiracy theorists or alt-right activists,
including Milo Yiannopoulis, Infowars founder Alex Jones, and the Infowars
account itself, all boasting millions of followers.

Looking Ahead

The rally
behind Twitter has been something of an anomaly among analysts. Josh Brown, CEO
of Ritholtz Wealth Management, called the stock’s rebound last year “the best
kept secret of 2018” compared to rival Facebook. With the frenzy surrounding the
government control of social media, Twitter became a treasurable boon to the
tech-heavy portfolios of yesteryear.

There’s a
lot to glean from Twitter in that its controversies are largely similar to
those of Facebook: spreading of misinformation and illegitimate accounts being
just two. However, Twitter’s newfound adjustment to a “monetizable” audience
will likely render the important growth metrics that analysts so favorably
crave.

That being
the case, Twitter boasts a strong road ahead for investors looking for a far
cheaper investment than its more expensive (and more over-analyzed)
counterparts.